Wait, what? I'm buying an asset with no intrinsic value? This is a big hurdle for most individuals. All your life you have known what money is/was. If you are a U.S. Citizen, you probably have not felt the effects of inflation. However, just look back at how much your parents paid for things, or listen to the lyrics of old songs. When my parents were children they used to buy things with nickels and dimes. So, the first thing to decouple is that the paper bills in your wallet are going to be worth the same purchasing power in the future as they are today. Once you realize the simple fact that the dollar you hold today will buy less in the future, you have to then think about where can you place that dollar today so it will maintain (or gain) purchasing power in the future. This particular mental hurdle is, in my opinion, the biggest thing Americans need to get over in order to feel OK with buying Bitcoin.
Once you understand that inflation is real, and is intentional, then you have to think about where to place your investments in order to beat inflation and mitigate your risk of loss of purchasing power. Unless you are following the financial markets/economy closely, you may not have known that the US Federal Reserve Bank has a goal of 2% annual inflation. The GOAL was for your dollar to be worth $0.98 the following year. The PUBLISHED results according to the Consumer Price Index, aka CPI, aka the U.S. Government's marker for inflation was 5.3% or $0.947. Let that sink in. If you had your dollar sitting in a bank account for the last year, it only buys 94.7 cents worth of goods today. (If you are reading the CPI index after Sept 2021, I believe that link I pasted above may not reflect the data as published regarding the August 2021 BLS CPI report.)
I emphasized published not because this is a conspiracy, but because this can't be the true number. You undoubtedly have talked to friends or colleagues about the housing market and you know that home prices are up over 20% in the last year. The home didn't get 20% better or bigger. The money got devalued/debased.
The United States Federal Reserve is not the only money printer in the world. During the Covid 19 Pandemic multiple other currency creators ALSO made new money out of nothing. (Bank of Japan, European Central Bank, etc.).
This all sounds fairly preposterous, right? Why didn't you know this? Why am I spreading some crazy conspiracy theory? This is not a conspiracy. This is reality. Google the information I pasted, or follow the links. But please, PLEASE know that the dollar is not a safe store of value. Consider storing some of your wealth in assets such as stocks, real estate, or Bitcoin. I am overweight Bitcoin because I think it is the most undervalued of those three options. Ideally your investment doesn't just not get inflated away to lower purchasing power, but instead BEATS inflation. Bitcoin has, on average, increased in value around 195% annually since it started. That was not a typo.
Alrighty then...just because I believe Bitcoin is the most undervalued does not mean it is perfect. Here are some issues: Slow speed of transactions, Lack of everyday spend, Government Acceptance.
As the bitcoin network is currently operating, there is a slowness to the transactions, which only close every 10 minutes. There is also variable, sometimes expensive, costs to get your transaction included in that block. People are working on both of these, and technology solutions are in the pipeline. It is possible to add a layer to the bitcoin network and sort of ‘piggy back’ onto the bitcoin blockchain. This will allow for the system to execute more transactions on the Lightning network, for example, that get melded with the Bitcoin network.
Initially bitcoin was thought to be a payment method. It certainly still can be, but the current mindset of most bitcoin holders (myself included) is that bitcoin is too valuable to spend. Buy and hold, for the long term. With a simple understanding of supply and demand, it is easy to appreciate that with each new bitcoin adopter/holder, there is less supply available for the next adopter to join. Hence, price rises as more people get on board the bitcoin train.
Governments try to ‘ban’ or limit the on/off ramps. I believe this is ultimately impossible. The code is open source and widely distributed. No nation-state actor is going to be able to stop the tidal wave of bitcoin at this point. This does not mean that nations won't try to stop it. China has 'banned bitcoin,' but ultimately I think this is going to be short-sighted of them. China has created a digital currency that actually gives that government MORE control over the money than they had before. I think the Chinese government is trying to push out the competing digital currencies so that the population is forced to use the digital yuan.
Bitcoin isn’t ‘regulated.’ This is a feature, not a bug. No entity has control over this system. The rules are plain, you just start participating when you want to. Eventually everyone will be participating. No entity is going to come along and print more bitcoin. The math/code behind the software has sustained numerous attacks and none have succeeded.
Fluctuations in price. This is undeniable. Everything changes in price. Nothing on this planet is worth anything unless someone else will pay you for it. At this point, the bitcoin adoption rate is still so small, there is a lot of runway for coins to appreciate in price as more people continue to learn about this new asset class. You could buy a Picasso today for millions of dollars, but in a few years, Picasso is out of favor and you cannot sell that artwork for your purchase price (consider a Michael Jackson master recording today vs 2005).
Black Swan Event---The network will go down. Let's just for a minute consider what this means. This means that the entire global computer network fails. That is an event that I cannot wrap my head around. IF the entire global computing network is down, value/store of wealth is going to be the least of our concerns. Aliens or an asteroid are involved. Get your bug-out-bag ready and head for your bunker in the hills.
The Bitcoin Network could get hacked. Well...no, it can't. I mean, people have tried, but none have ever succeeded. And other, newer networks HAVE been hacked. But Exchanges have been hacked. The most famous hack was Mt.Gox, where hackers stole the bitcoin off of that system. A lot has happened since then, and those bitcoin are a bit of a pariah in the network now, so I don't even think those hackers are going to be able to spend them. Nonetheless, people/users/investors lost their funds. This risk is real. An equivalent today is if Coinbase, Voyager, Binance, Gemini, etc got hacked. This risk is mitigated by not storing your wealth on those exchanges.
In my opinion, while these risks are real, I think that none of them kill the value proposition. All of them will be overcome. Many smart people are working on solving these problems.
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